The Eu85 million ($108 million) debt financing for the 88.6MW Rabai independent power project (IPP) in Kenya is remarkable for being not only the first power project financing in the country since the TSAVO Power IPP project in 2000, but also for closing against the backdrop of debt market turmoil and at the originally agreed pricing.

The 20-year BOOT concession has had a troubled birth, having been tendered twice and taken through the courts by a despondent losing bidder.

The deal was initially sponsored by Aldwych International and Burmeister & Wain Scandinavian Contractor A/S (BWSC), who won the first tender in 2005 for what was then called the Embakasi project.

The Embakasi tender was for a plant near Nairobi airport but airport authority concerns over interference with air traffic and the high cost of bringing fuel from Mombasa resulted in the project being moved to Rabai, 20km from Mombasa. The relocation of the project prompted a re-tendering by Kenya Power and Lighting Corporation (KPLC) in 2006 which Aldwych and BWSC again won with an energy cost bid of US$c13.4035/kWh – beating rival bids from Simba Energy (US$c13.1032/kWh), Wartsila (US$c14.0755/kWh) and Globeleq (US$c13.2414/kWh).

Although it seemed that the Aldwych/ BWSC bid was only third cheapest, Globeleq had made some assumptions concerning the fuel consumption/fuel cost that made the evaluated energy cost higher than the Aldwych/BWSC price. Simba's proposals did not pass the mandatory qualification criteria mainly due to lack of references and experience.

Despite the shortcomings of Simba's proposal, KPLC was tempted by the low tariff and started negotiations with Simba for a single sourcing procurement for an alternative plant at a different location. In mid December 2006, it became apparent that a single sourcing arrangement would go beyond the mandate of the procurement regulations, which could not be permitted. Simba Energy then filed an appeal against KPLC's award of the Rabai project.

KPLC reaffirmed its position and Simba appealed to Kenya's Public Procurement Complaints, Review and Appeals Board, which also rejected its case. In late February 2007 Simba filed an appeal in the High Court of Kenya and requested a stay over the project. The stay was rejected and the case postponed a number of times until a final hearing date of 15 October 2007 just prior to which Simba unconditionally withdrew the case – Simba had reached agreement with KPLC that the parties should enter into negotiations for an alternative plant at a different location.

With the legality of the award beyond dispute – and in effect having secured the deal for a third time – the initial sponsors were then joined by IFU and FMO in the Rabai equity line-up and moved towards financing.

Funded on a 70/25/5 debt-equity-mezzanine ratio. The Eu79 million 15-year senior debt is priced at 350bp over Euribor and the Eu5.6 million 15-year mezzanine at a 750bp margin. DEG, Proparco, FMO, Emerging Africa Infrastructure Fund (EAIF) and European Financing Partners (a development finance entity founded by EDFI members and the EIB) provided the senior tranche with EAIF and Proparco also putting up the mezzanine. The average debt service coverage ratio projected over the project life is 1.6:1.

Despite closing two months later than initially expected and rumours of a flex, both tranches came in at the original pricing. The hold-up was partly due to one of the lenders having to get comfortable with using Bank of New York as depositing cash agent given the crash in the US bank market.

Although relatively small, the project is physically configured to allow for an expansion of up to double its size. The plant will consist of five Wartsila 18V46 medium speed heavy fuel oil driven generator sets, and a 6.5MW steam turbine generator to increase output and efficiency.

First power is scheduled for December 2009 with plant completion early 2010 – a short construction period enabled by BWSC's brave exercising of its engine options with supplier Wartsila prior to financial close: The move was forced by the delays caused by Simba's legal challenge, because having reserved Wartsila engines for a limited period, the sponsors faced another two year waiting list if BWSC did not exercise the option on time.

A fixed price EPC contract was formalised prior to financial close with BWSC and its Kenyan subsidiary to build the heavy fuel oil plant while sharing a 20-year O&M contract with Aldwych.

The project has the comfort of a 20-year power purchase agreement with KPLC and although fuel oil supply has yet to be finalised, the sponsors have shortlisted two suppliers who will supply directly from the refinery in Mombasa or import via the Port of Mombasa. The Kenyan government has also provided a support letter, which affords the project a degree of protection from political risk.

Although Rabai is a relatively straightforward IPP in a market where demand is rising at around 90MW per year, it is still a significant achievement given the collapse of the international money markets and the legal delays to the project. Of the headline deals to close across the world's project markets in the past months, Rabai is the repeatable benchmark for emerging markets projects going forward – good pricing and strong development fund support.

Rabai Power Ltd
Status: Financial close 8 October
Description: 90MW greenfield IPP financing in Kenya
Sponsors: Aldwych International; Burmeister & Wain Scandinavian Contractor A/S; FMO; IFU
Lenders: DEG; Proparco; FMO; Emerging Africa Infrastructure Fund (EAIF); European Financing Partners
Financial advisor to EAIF (and lead arranger): Frontier Markets Fund Managers
Sponsor legal counsel: Trinity International
Lender legal counsel: Allen & Overy